Felix Gendron the Student Landlord

Hugh Godman, Business & Economics Editor » thecampus.businesseditor@gmail.com

Financial Illiteracy: the Trojan Horse that May Lead to an Economic

Ragnarök Jay Sharma Contributor

The COVID-19 pandemic has shone a light on a lot of weaknesses that the Western world must face going forward. For example, countries’ ill-preparedness to combat deadly outbreaks, the delicacy of a globally integrated supply chain, institutional racism and an overall sense of disenfranchisement felt by minority groups. However, a not-soobvious weakness that is arguably a foundational aspect of all the aforementioned issues Western nations face is a complete and potentially devastating lack of financial literacy.

According to Investopedia.com, “Financial literacy is the ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing.” An individual’s financial literacy is a determining factor in whether or not they will achieve their life goals.

William Canning is a recent Bishop’s graduate that majored in accounting and minored in IT, and I have personally known him for many years before our BU adventure. I asked him how his ability to manage his finances helped him with stress and worry. He shared the following: “The awareness that a multitude of financial tools and resources were at my disposal was the most securing thing as a student. The second most securing thing was having the knowledge and abilities to utilize those same financial tools and resources. Learning about concepts such as budget management, taxes, banking, investing, and insurance has allowed me to continuously and efficiently monitor my money to plan for my future needs. All in all, being financially literate has provided me with the confidence to independently manage my money and attain financial stability.” I also asked him how important he thinks it is for the general population to be financially literate, to which he replied: “Once you understand that every purchase is a vote towards an idea, mission, or value, you recognize that it is your responsibility to ensure you are investing in the ideas, missions, and values that you believe in. The importance of financial literacy lies in the fact that it can enable you to build wealth around the values you believe in, contributing to the world of tomorrow.”

Bishops University Finance Society President and SEED Portfolio Manager Max Laurin shared this statement on the matter: “Financial literacy is an integral asset to managing one’s life. Seventy-eight per cent of Canadians believe that they are financially literate; however, in a 2017 survey where six out of 10 Canadians participated, only 43 per cent passed a basic financial literacy test. I fear that future generations with no knowledge of the credit system, tax incentive plans, or financial markets will indebt themselves at a young age and not have the tools to properly grow their savings needed to retire. This concern is highlighted in the same survey, as only 31 per cent of millennials passed the aforementioned test. Additionally, they were the most likely of all age groups to rate their knowledge as ‘Excellent,’ yet failed more than all other generations that participated.”

Canada’s household debt-to-disposable-income ratio supports the claim that Canadians lack financial literacy. An Ipsos survey conducted by Canadian accounting firm MNP shows that more than half of Canadians are a $200 expense away from not being able to pay their bills. Pre-COVID-19, the nation’s household debt-to-disposableincome ratio was 175.6 per cent, with “household disposable income” referring to a household’s income after taxes are deducted. As of June 7, 2020, this debt ratio had risen by over a percentage point to 176.9 per cent, and, in fact, it has been on an upward trend since the ’90s (see graph).

Now, what are the implications of a rising debt-to-disposable-income ratio? If we see defaults on a mass scale, we could see consequences even worse than what came to pass in the 2007–2008 financial crisis. People could lose their homes, jobs, and even their lives. Based on a study presented in the book Corporate Flight, a percentage-point increase in the United-States’ unemployment rate is associated with the deaths of 37,000 Americans. Note that this study was conducted in 1981, and the different realities of today could cause the outcome of unemployment to be less severe, but this information nevertheless presents a scary possibility for Canada and the Western world.

Despite the daunting statistics, there is still hope. With good educational reform and motivation from individuals with a strong financial sense, we, as a society, can turn things around and make the world a better, more financially literate place. It will not happen overnight, but by targeting our youth and reinforcing their education surrounding personal financial management, budgeting, and investing, we can create a strong foundation for future generations to build upon.

Canada’s household debt-to-disposable-income ratio over the past 30 years Graph Courtesy of Pete Evans of the CBC. Source: Statistics Canada.

Hugh Godman Business & Economics Editor

Last year, Félix Gendron, a 22-year-old BU student, independently acquired a duplex for $230,000. Now, king of his castle, he lives there rent-free with several of his buddies.

According to The Wall Street Journal’s podcast, “When it comes to homeownership, the rates for young people are near the lowest levels in about three decades that these records have been kept.” So, how did Félix beat the odds? By creating “margin.” That is a margin between income and spending.

In CEGEP, he secured a position at a local accounting firm. By the time he started full-time studies at Bishop’s, in 2018, he was working 30 hours a week at this firm. Evidently, he was earning a sizable income relative to most university students. But income is only a part of the “margin” equation. Félix also had to keep his consumption in check.

In this matter, one could say he had a “home-field advantage,” as his parents reside in the area and he was able to live with them until he acquired his house. Notwithstanding this advantage, saving up $11,500 for a down payment is an impressive feat.

Once he secured the necessary funds for a down payment, it was time for Félix to select the property. He wanted a place that would not require any major work within the next five to 10 years —the amount of time he foresees himself continuing his studies while he works on his second bachelor’s degree beginning this semester. He found a duplex located between Bishop’s, downtown Sherbrooke, and Fleurimont and deemed that the place was selling for a fair price, given that he acquired it at 3.6% below the municipal valuation.

Expenses, including home maintenance, electricity and Wi-Fi for the downstairs unit, municipal taxes, home insurance, and interest on the mortgage, averaged out on a monthly basis, amount to $1,453.33. Rental income from Félix’s three friends and the couple living in the upstairs unit amounts to $1,610 per month. So, the accounting profit from the property is $156.67 per month. That said, Félix also makes payments to service the principal on his mortgage, which is not an expense. Paying off the principal of his loan with the bank reduces this liability and creates home equity—the difference between what is owed on a home and what the home is worth. This payment does not alter Félix’s net worth, he is simply transforming cash into home equity. Currently, Félix is paying off about $452.89 of the principal per month, and with the $760 of interest being paid monthly, the total mortgage payment amounts to $1,212.89 per month. Note that as the principal on the mortgage decreases over time, a greater proportion of Félix’s mortgage payments will go toward paying off the principal because there will be less interest to pay. This effectively decreases the expenses associated with the property and increases its profitability.

So, after the $156.67 profit generated by the property is deducted from the principal payment on the mortgage, Félix puts an additional $296.22 toward the mortgage every month. This is less than what Félix would be paying in rent if he were renting a place instead of owning one. Yet now, Félix owns an asset that can generate income and has the potential to offer capital gains—a positive difference between the selling price and the purchase price.

Although this arrangement appears to have worked out for Félix, it has involved a degree of sacrifice, for instance, a lower level of involvement in BU extracurriculars. He does not necessarily recommend homeownership to other students.

It is important to be cognizant that there are other investment opportunities than buying a house, including ones that require less upfront investment and less time commitment than being a landlord. But, regardless of the investment, the first step tends to be the same: create a margin between your income and your spending.